Business Markets - 30/April/2021

New supply chain law could help spur the energy transition

An upcoming EU supply chain law may see multinational oil and gas companies face a rise in lawsuits stemming from the environmental impacts of their operations. These traditional energy firms may consider driving more investments into less-risky renewables as a result

Nigerian and Ugandan oil projects have faced national court cases in Europe over environmental harm

DUE DILIGENCE New laws will mean companies have to evaluate even greater risks for new oil and gas projects

SAFER BET Cleaner energy projects, notably wind and solar, could benefit as companies seek to protect their investments

KEY QUOTE Companies will have to prove that they have set up appropriate processes to identify risks of whether and how their suppliers might violate international standards

Between 2011 and 2017, roughly 21.7 million litres of oil—equivalent to nine Olympic swimming pools—have been spilt in Nigeria’s Niger delta by European-based oil and gas companies Shell and Eni, according to a recent investigation by Amnesty International, a human rights NGO. For decades, oil spills have damaged the environment and livelihoods in southern Nigeria. The companies say sabotage was the cause for the many oil spills. In 2019, Shell recorded 156 theft and sabotage-related spills, but the locals blame neglect of corporate responsibility.

Soon, such disputes might more frequently land on the tables of judges in Europe. A legal precedent has recently been set in the Netherlands, where a group of Nigerian farmers and the Dutch arm of NGO Friends of the Earth sued Royal Dutch Shell because of lost income from oil-polluted land and waterways. In January 2021, 13 years after the first complaint was filed, the Dutch Court of Appeals ordered Shell’s subsidiary in Nigeria to pay compensation and further obliged its parent company to install detection equipment to prevent future spills.

“Finally, there is some justice for the Nigerian people suffering the consequences of Shell’s oil,” said Eric Dooh, one of the plaintiffs, in a statement released by Friends of the Earth. Channa Samkalden, lawyer for the campaign group, added: “It is now clear that a parent company can have a duty to interfere in the behaviour of its subsidiary. It will have to deal with that liability risk and—even though this judgment applies only to Shell—so will other transnational corporations.”

INCREASED ACCOUNTABILITY

However, a lack of existing European legislation makes bringing similar court proceedings difficult. “This case took way too long and the court had to apply Nigerian law, since that’s where the damage happened”, explains Lara Wolters, an MEP from the Netherlands. But MEPs are working on new laws that could change this. Wolters is one of the parliamentarians responsible for negotiating a new EU supply chain law and drafted the report on the issue that the European Parliament adopted in February 2021.

“If this gets through, companies will have to prove that they have set up appropriate processes to identify risks of whether and how their suppliers might violate international standards,” she says. Additionally, courts could examine if companies are living up to their obligations in protecting human rights and the environment. Importantly, that obligation would not mean that a company is automatically accountable if something goes wrong in its supply chain—a fact that is often misunderstood in the discussion about the new law, creating unnecessary panic, Wolters adds.

“A company would need to show that it has taken all due care to address risks. The supply chain law is above all a duty to take care,” Wolters says. In the case of the recent trial on the oil leaks in Nigeria, a supply chain law would have made the legal situation much clearer, she adds. The court could have more easily applied the European law, with clear guidelines provided in the legislation, to hold the company accountable. Instead, the court had to apply Nigerian legislation, as that was where the damage occurred. “The process would not have taken 13 years,” with a European supply chain law, Wolters suggests.

INCENTIVE FOR RENEWABLES

As the European supply chain law is still taking shape, it is hard to foresee its exact effects. “We need to monitor how oil and gas companies are responding,” says Chima Williams, lawyer and director of Friends of the Earth Nigeria. Currently, the oil and gas sector accounts for about 10% of Nigeria’s GDP and over 85% of its total export revenue, making it a core business for the Nigerian economy. However, Chima believes that paying the appropriate due diligence will dramatically increase the risks for oil and gas investments being held accountable and thereby decrease profits that the multinationals make in the Niger delta.

This might drive more investments into less-risky renewables. “If one form of business is not profitable, other options will be explored. The Nigerian market for electricity and renewables is enormous—companies know that,” he adds.

In a country where only around 57% of the population has access to electricity, and 99% of these grid users regularly face power outages, investment opportunities for renewables seem vast. Already, there is a rise in investments in renewable energy companies by international venture capital firms, donor governments and institutions like the World Bank.

DUE DILIGENCE

Due diligence legislation is, of course, not the only factor driving global investors into the safer bet of renewables. Still, new legislation that makes due diligence and project operation more expensive could make oil and gas companies think twice. “It should be far more difficult to build such business models of oil explorations when companies have to step up their due diligence. We are hopeful that this will help the energy transition,” says Christopher Patz from the European Coalition for Corporate Justice (ECCJ), a research group.

The impact of the new law might be lessened, however. To minimise risks of sabotage, kidnapping and crude theft, oil and gas companies are exploring offshore fields, raising transparency concerns. “Shell is divesting their onshore investments and investing more offshore to avoid scrutiny as there is less contact with the local population. Environmental destruction also happens off the coast,” Chima says.

Shell, however, rejects such claims. Moving offshore would only make production safer since sabotage risks on the drilling site are minimized, the company says, referring to its sustainability report. Yet, oil and gas exploration in the deep sea poses further challenges for environmental management. This is especially pressing in Nigeria, where existing regulations and their implementation have been found to be too weak to protect the marine environment.

PUT INTO PRACTICE

A case similar to the proceedings against Shell in Nigeria is currently on trial in France. A group of six NGOs have sued the French multinational oil and gas company Total over plans for a new project in Uganda. There, in the western Lake Albert region, Total plans to drill over 400 oil wells, producing around 200,000 barrels of crude oil a day. Additionally, a new 1445 kilometre long pipeline is being constructed.

While the company has pledged to take into “highest consideration the sensitive environmental context and social stakes of these onshore projects”, 38 environmental and civil society organisations have published an open letter, saying that the negotiating parties failed to address the environmental and social concerns regarding the project. Also, the ongoing court case in France had been disrespected, the signatories say.

The basis for this ongoing lawsuit is the French vigilance law, adopted in 2017 as a legal consequence of the collapse of the Rana Plaza building in Dhaka, Bangladesh, which housed five garment factories and resulted in the deaths of 1134 people. After the tragedy, NGOs stepped up pressure to make companies accountable for their suppliers overseas and the French courts reacted.

The case against Total is the first time this new law will be put into practice. “As it’s the first time, we don’t know how far a judge will go with a court order. But we hope that this legal action can help stop the current human rights violations and the coming environmental disaster. We want to improve the conditions for the over 100,000 affected people and mobilise similar actions against big corporations,” says Juliette Renaud from Friends of the Earth France. This also means increasing efforts to get a more ambitious EU supply chain law, she adds.

COMMISSION PROPOSAL

The European Parliament hopes to pass a regulation that goes further than national examples. The EU regulation would include civil liability and human rights violations, as well as both environmental and climate damages. At the same time, the regulation would be applicable to SMEs—which make up over 90% of European companies.

The European Commission is expected to present its legislative proposal in June. After this, the member states will step into the negotiations.

“With the current government, the influence of the business lobby on the debate has been disproportionate. But by the time the EU law is up for debate, the German government will have changed,” says Patz from ECCJ, pointing towards the country’s national elections in September.

“Supply chain laws are not supposed to lead to divestment, but these cases clearly show how problematic the business model behind such oil and gas exploration projects are,” he adds. Cases such as the one against Shell in Nigeria and the one against Total in France set an important precedent for the ongoing debate.

TEXT Alicia Prager  PHOTO Milieudefensie

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